Accounting concepts/conventions and policies

Always on the exam!! MCQ?

Background / development
Accounting practice has developed over hundreds of years Certain practices have developed over time.conceptsnow conventions The statement of principles operates alongside them

The Financial Reporting framework consists of 2 elements 1. The conceptual framework 2. Generally accepted accounting practice (rules and regs!)ACCOUNTING STANDARDS

Accounting concepts / conventions can be viewed as ideological practices that have developed over time that underpin accounting They help determine which transactions are recorded and how.

Accounting Concepts / conventions

Business Entity Duality Money Measurement Realization Substance over form Prudence Consistency Matching (Accruals) Going concern

Important Concepts
SSAP 2 described 4 concepts as Fundamental Going Concern Consistency Prudence Accruals

1.

2.
3. 4.

Important Concepts
FRS 18 replaced SSAP 2 in Dec 2000 Emphasises 2 particular concepts Going Concern & Accruals Prudence & consistency merely desireable elements of statements

Advantages of a Conceptual Framework

Move away from fire fighting Avoid inconsistencies between standards Determine how profit should be measured Reduce number of standards, emphasis on principles Combat interference, justify procedures

ASBs Statement of Principles (1999)

Finally published in March 1999. Principles that should underlie the preparation and presentation of financial statements. True and fair view important.

8 chapters in S.O.P: 1 2 3 4 5 6 7 The objectives of financial statements The reporting entity The qualitative characteristics of financial information The elements of financial statements Recognition in financial statements Measurement in financial statements Presentation of financial information

Accounting for interests in other entities

The first 4 are the most important for 1.1 studies

2.1.1 Purpose of the SoP

ASB Develop future, and review existing, a/c standards. Reduce the number of alternative a/c treatments. PREPARERS AUDITORS

Apply a/c standards.

Deal with topics not covered by a/c standards.

TO ASSIST

Assist in forming an opinion on whether fin state conform with a/c standards.

USERS
In interpreting the information in financial statements.

Elements of Financial Statements

Assets
Probable future economic benefits obtained or controlled by an entity as the result of past transactions or events

Liabilities
Probable future sacrifice of economic benefits arising from present obligations to transfer assets or provide services in the future as a result of past transactions or events

Owners interest
The residual interest in the assets of an entity that remains after deducting its liabilities

Chapter 3 Qualitative Characteristics of Financial Information (S.O.P)

RELEVANCE RELIABILITY COMPARABILITY UNDERSTANDABILITY

Characteristics of Useful Information

Relevant
Complete and faithful representation Influences economic decisions

Reliable

Comparable

Similarities and differences can be discerned &evaluated

Significance of information can be perceived

Understandable

Part 2
Generally Accepted Accounting Principles (GAAP)

Statutory Requirements: Company Law; EC Law; Directives Stock Exchange Regulations: Listing Rules (Yellow Book)

Accounting Standards:
SSAPs; FRSs; UITF Abstracts

The companies act and accounting standards

The two are essentially separate But. CA requires companies to include a note to the accounts saying that they have been prepared in accordance with applicable accounting standards Or giving details of any departures

The Standard Setting Process

Financial Reporting Council (FRC)
Accounting Standards Board (ASB) Review Panel

Issues: Discussion Drafts FRED FRS

Urgent Issues Task Force (UITF)

Issues: Abstracts

FRS 18 Revisited
FRS 18 replaced SSAP 2 in Dec 2000 Emphasises 2 particular concepts Going Concern & Accruals FRS 18 provides detailed practical implementations of the concepts outlined in the S.O.P

FRS 18 and Accounting Policies

FRS 18 requires that the specific accounting policies adopted by an organisation are properly disclosed. The Accounting Policy chosen should be the one that gives a true and fair view

FRS 18 and Accounting Policies

Accounting policies are the principles, bases and practices applied by an organisation. They are how an organisation chooses to recognise, measure and present components of financial information e.g a policy to depreciate office equipment rather than not depreciate it

FRS 18 and Accounting Policies

Estimation Techniques are the specific methods adopted to estimate (measure) the monetary amounts for the components of financial statements. E.g straight line or reducing balance E.g increasing bad debt provision from 5 to 7%

Accounting policies and Estimation techniques

The distinction is an important one in practice: Changes in accounting policies are dealt with as prior-year adjustments. Changes in estimation techniques are only reflected in the profit and loss account for the year of change.

Choosing an accounting policy involves making a selection of three factors:

Whether or not to recognise elements as a result of the transaction recognition criteria.

How to attribute a monetary amount to the elements that are recognised measurement bases.
Where to present the elements in the financial statements.

Estimation techniques are the methods adopted by an entity to arrive at the estimated monetary amounts (corresponding to the measurement bases selected) for elements of the financial statements.

Change in Accounting policy?

FRS 18 says that a change of accounting policy has occurred where there has been a change to any one of the components of the definition: Recognition criteria Measurement basis Method of presentation

eg 1: change in depreciation method

This decision does not involve a change in any of the three key criteria: The fixed assets are still carried at cost less accumulated depreciation. The depreciation is still allocated to individual accounting periods so as to reflect the consumption of economic benefits. Fixed assets and depreciation are presented in the same way in the balance sheet and the profit and loss account respectively.

eg2: change in stock valuation from wac to fifo

This involves a change in the basis used to measure stocks from average cost to historical cost and as such represents a change in accounting policy.

eg 3: a company decides to capitalise finance costs incurred building a factory instead of writing them off
Recognition the costs are now included as part of an asset. Presentation the costs are now presented in the balance sheet rather than the profit and loss account. This decision represents a change in accounting policy

Essential Reading for next week

Read over consolidated accounts in your study pack!!!